Gauging your ﬁnancial ﬁtness is crucial for ﬁrst-time homebuyers. The better shape you’re in ﬁnancially, the more likely you are to succeed at homeownership. That’s because a strong credit history, lean debt-service ratios and a robust down payment work together to promote affordability. For the best mortgage terms and rates, it pays to be ﬁt! Here’s how to assess and improve your ﬁnancial ﬁtness.
Your credit score indicates how reliable you are as a borrower. Canada’s two credit reporting agencies, TransUnion and Equifax, assign a credit score that’s between 300 and 900. Order your credit report and check your score. Is it…
680 OR ABOVE?
Good: You’re considered a lower-risk borrower and will receive better interest terms.
Room for improvement: As a higher-risk borrower, you’ll be offered less favourable terms and interest rates.
Boost your credit score by…
- Never using more than 75 per cent of your available credit. Ideally, aim to keep it under 50 per cent (better) or even 30 per cent (best!).
- Paying your monthly bills on time. Late payments can lower your score.
- Opening a credit card or line of credit – and using it responsibly by paying at least the minimum payment on time – if you wish to build credit history.
Your debt-service ratios help lenders determine how much mortgage you can afford, given your debt payments, monthly expenses and income. This is assessed through two different ratios: gross debt service (GDS, or the percentage of your income that goes toward paying your housing costs) and total debt service (TDS, or the percentage of your income that goes toward housing costs (GDS) plus your other monthly obligations, such as debt repayment). Here’s how to find out how yours stack up.
GDS: Calculate your GDS ratio by adding up your monthly housing costs (anticipated monthly mortgage principal and interest payments based on the Bank of Canada’s five-year fixed term rate, taxes, heating costs and, if applicable, 50 per cent of your condo fees), and then dividing that amount by your gross monthly income. Multiply the sum by 100.
TDS: Calculate your TDS ratio by adding up all of your monthly debt payments (housing costs plus car payments, credit card payments, student loans and, if applicable, child support and alimony), and then dividing that amount by your gross monthly income. Multiply the sum by 100.
To qualify for mortgage insurance, you’ll need a GDS ratio of 39 per cent or less, and a TDS ratio of 44 per cent or less.
Lower your debt-service ratios by…
- Paying down your consumer debt.
- Increasing your verifiable income with a reliable part-time job.
- Lowering the amount of your prospective mortgage with a larger down payment.
A healthy down payment will make a big difference in your overall fitness to buy your first home. Although mortgage insurance allows you to buy with as little as five per cent down, under Canada’s new mortgage rules introduced last fall, you’ll need to bulk up that nest egg for anything beyond a very modest starter home.
For homes in the $500,000 to $999,999 range, you’ll need an additional 10 per cent down payment on the portion of the home’s purchase price over $500,000.
For homes costing $1 million or more, you’ll need a minimum down payment of 20 per cent to qualify for a bank mortgage.